As published in the Caymanian Compass – 10 October, 2012 http://www.compasscayman.com/caycompass/2012/10/10/Bank-forced-sales–Opportunities-and-caveats/
Cayman’s slow period or low season, primarily in respect to Seven Mile Beach properties, generally coincides with hurricane season; therefore we have two more months in which we will most likely see slow movement in the real estate market. In particular, the market for properties under $500,000 has been particularly slow over the past 12 months, no doubt due to the lower demand caused by the absence of foreign workers, as indicated by the drastic reduction of work permits in the thousands in recent years. This is slowly turning the other way and should continue to increase going forward.
Transactions in the higher end of the market continue to fare much better, particularly in the $2 million plus area of the market. Buyers in this segment seem to have been largely unaffected by the economy and still have money to spend on luxury properties here in the Cayman Islands. Movement in the $1 – $2 million category is still sluggish: buyers in the US mid-sector likely still need to see an improvement in the US economy before having the means to once again seek to invest in an offshore vacation home.
Q&A with James – Bank Forced Sales
This month we thought we would introduce a direct question and answer session with James. We chose the topical subject of bank forced sales to begin this new segment of our Market Update.
Q. Is the frequency of forced sales increasing in the Cayman housing market?
A. About two years ago we saw a marked increase in bank forced sales and this increased further about a year ago. Since then we have seen a steady flow.
Q. Are forced sales more in the residential or the commercial sectors?
A. Bank forced sales have taken place predominantly in the residential sector. This is because commercial sales are handled quite differently from residential in that a higher degree of equity is required for initial investment by the purchaser than with residential property. If issues arise commercial property owners inevitably seek to refinance their loans. The commercial sector is also a much smaller market.
Q. How does a bank price a forced sale? Is it a certain percentage of prevailing value, or is it up to a broker or appraiser?
A. The bank is obligated to get the best possible price for the sale of the property, which should, if possible, include a return for the owners themselves. They will use a quantity surveyor or appraiser to establish the market price and usually will go to market with a market value as they have a duty to offer it at market value. In time a reduction in price may assist with the speed of the sale. Attractive prices means the market has a reason to react. If the sale is by private treaty then the bank must go back to the Courts if the sale price needs to be reduced further than the price the Court had initially specified as a reserve. This stipulation is not required however if the property is being sold at auction. We shall discuss this subject in greater detail in our next market update.
Q. What’s a typical forced home sale like? Is it usually a dilapidated house (maybe left over from September 2004’s Hurricane Ivan), or does it include condos from which owners have recently moved out?
A. It is a rare case where a foreclosed property has been well-maintained. Unfortunately bank forced sales are usually required when a home owner has been unable to pay their mortgage, let alone adequately maintain their property. That said, good opportunities can be found, as long as it is within an acceptable price range and the buyer is aware of the cost of repair, etc. These homes have rarely been homes damaged by Hurricane Ivan, as much time has passed since this storm.
Q. Is it easy for realtors to gain access to such properties?
A. Gaining access to such properties can be problematic for realtors, especially if the owners are still living there and are reluctant to sell. While everyone is thinking about the economic benefits of purchasing such a property, it is important to also bear in mind the hardship involved with regard to the original owner. It is an extremely upsetting and difficult situation and often places extreme pressure on the owner and their family. We have to remember that Cayman is a small community and someone’s opportunity is another’s misery. It is an emotionally-charged area of business for realtors and is a lot like being a divorce lawyer where there is often a great deal of negativity and hostility involved in the process.
Q. The average person may think the average bank forced sale is a fixer-upper house that’s priced to sell, but may need significant capital injection in order to realise its potential. Is that accurate, or is that an image gleaned from watching too much HGTV?
A. Very often people whose homes are the subject of a bank forced sale are those who have had the least amount of equity invested in their property. They may have borrowed 95 or even 100% of the cost from a combination of bank and government-backed loans, often over-stretching themselves in the process. They are generally on a lower income than average or they may have just fallen on hard times and lost their jobs. In any event, there will most likely have had little income to maintain the property. I would caution those watching reality TV which shows fixer-uppers in the US being ‘flipped’ for a low cost and at quick speed. The environment is a very different one in which to operate here in Cayman: we have much less flexibility in pricing of property, cost of materials, labour to do the work and there is no way you can flip a property as quickly or as cheaply as they do in the States. The average time on market for a home is around a year and the investor must also consider the stamp duty cost on purchasing property. Such “reality TV” programmes are designed as entertainment rather than documentary and should be viewed as such.
Opportunity is usually a diamond in the rough – it is up to the astute buyer to spot it!